According to Federal Reserve studies, from the early 2000s until the present, consumers have made more payments through the use of electronic forms of payment than check. Electronic forms of payment include credit and debit card purchases. Consumers are less likely to carry checks and are more likely to make payments using electronic methods. Point-of-sale devices that accept electronic payments are becoming more prevalent and are typically expected to be available to the consumer in most businesses. Additionally, as the use of the Internet increases, where electronic forms of payment are typically the standard method of payment, with checks being the exception, consumers are relying upon electronic forms of payment in ever increasing amounts.
When making payment using electronic methods, networks that process the payment typically charge a fee to recoup the cost of providing the network. This fee is typically called the interchange fee, and is assessed by the bank of the credit card issuer to the bank of the merchant. The fees, as assessed by the banks of the credit card issuer, are to cover the costs of converting the charge on the card to a cash deposit at the merchant's bank. The fees may also include billing services, fraud protection as well as to provide for a profit margin. Although the calculation of the interchange fees varies among card issuers, one of the primary factors in the equation to determine the interchange fee is a percentage of the purchase as well as the rate of credit card use by the merchant.
For example, a credit card issuer may set an interchange fee of 4% for credit card purchases. The credit card issuer may systematically reduce that percentage if the merchant has a high rate of usage of credit cards. Thus, for example, a profitable online merchant that only accepts credit card payments may have their interchange fee reduced from the exemplary 4% to 3%, or even further if the usage increases. A disadvantage of this is that some merchants may be hesitant to allow credit card purchases because of the typically low use of credit cards in their stores, and may be even more hesitant if the typical purchase amount by the consumer at the merchant is especially high, as the interchange fee is assessed on the merchant, not the consumer.
For example, credit cards are typically not used as payment for a car because the number of cars sold in a typical lot may be only two or three cars per day on average whereas the average cost of each car may be over $10,000. Thus, if a reduced interchange fee rate was not reduced for the merchant for a $10,000 purchase, the interchange fee may be $400. Because the interchange fee is typically assessed on the merchant rather than the consumer, if the card dealership wishes to take credit cards as a form of payment, to make the same profit the dealership may need to increase the selling price of the car, potentially placing the dealer out of competition.